OUTLOOK ’13: Asia chemical shipping freight rates likely to soften

21 December 2012 01:57[Source: ICIS news]

By Muhamad Fadhil

SINGAPORE (ICIS)--Chemical freight rates in Asia are expected to soften in 2013 because of weak demand for petrochemical and palm oil cargoes and uncertain global economic conditions, according to several market players.

Fewer contracts of affreightment (COA) are expected to be settled in the Middle East because of slowing growth in Asia and debt woes in Europe and the US.

COAs are agreements between charterers and shipowners for the carriage of large volumes of cargoes over a fixed period of time.

Shipowners prefer COAs as it provides a guaranteed source of income as compared with prompt shipments. However, due to an uncertain market outlook, charterers are expected to hold back on agreeing to COAs.

“Fewer COAs will be signed as charterers are unable to properly gauge demand. They can make significant losses if they overcommit and fail to secure enough shipments,” according to a market player.

As a result, more prompt cargoes may be booked, potentially causing significant, but temporary price hikes during festive periods and bad weather. However, prices will likely soften during lull periods, the market player said.

“If fewer COAs are agreed, more frequent price fluctuations can be expected,” the market player added.

Intra southeast Asia freight rates are also expected to soften significantly because of a lack of demand for chemical cargoes.

During the past few months, ship owners and charterers received fewer enquiries for prompt shipments as downstream buyers, uncertain about near-term price direction, held back on purchasing new material.

Despite the subdued activity, rates for popular routes such as Singapore to Bangkok and Jakarta were stable at around $32-36/tonne (€24-27/tonne) for most parts of the year.

“Trading activity in southeast Asia continues to remain subdued. As such, freight rates may fall steadily after the Lunar New Year as demand is expected to weaken further [with inventory requirements met],” a southeast Asian-based charterer said.

Industry players in northeast Asia are also closely watching Lunar New Year-driven demand, saying trading activity may not pick up quickly after the festival in February.

From March, market players in northeast Asia will likely adopt a wait-and-see approach before committing fresh purchases of chemical cargoes, as they are unable to properly gauge near-term downstream demand.

“We may see a brief spike of freight rates leading up to the Lunar New Year, but don’t mistake that for a bullish market. Prices will likely go downward after the festival as market players will not know what to do next,” a northeast Asian industry source said.

Weak demand from South Asian palm oil end-users is also expected to exert downward pressure on palm oil freight rates for vessels travelling from southeast Asia to India.

Palm oil vessel rates increased in end-November and early December because of tight tonnage in India and China.

Buyers in China were aggressively stocking up on the commodity ahead of expected quality control measures by Beijing, starting January, leading to vessel shortage across Asia.

Indian buyers also purchased more palm oil because of higher year-end demand.

However, with Chinese and Indian end-users sufficiently stocked up, fewer palm oil shipments are expected to be shipped from southeast Asia to India and China after January.

“Palm oil demand is expected to soften, especially because of an oversupply of the commodity,” a market player said.

Shipowners also said competition is stiff in the chemical shipping market with more players offering attractive rates to bring charterers and end-users forward.

However, they added that higher bunker fuel prices, their single biggest operating expense, are expected to squeeze their margins.

According to Bloomberg, the price of bunker fuel rose by 11% since the end of June and is heading for a record annual average.

If the uptrend continues, overall profits for 2013 may be lower than anticipated and shipowners are not ruling out incurring losses.

“Our revenues will be impacted in 2013 because of more expensive fuel price and higher operating expenses. Very tough market to survive,” a southeast Asian shipowner said.